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INNOVA Gaming Group Announces Q3 Financial Results

LOS ANGELES, Nov. 10, 2016 /CNW/ - INNOVA Gaming Group Inc. ("INNOVA" or the "Company") (TSX: IGG), today announced financial results for the three and nine months ended September 30, 2016. All figures in this press release are in U.S. dollars, unless otherwise noted.

Highlights – Operations

Deployed 52 net new LT-3 ticket dispensers ("LT-3") in Q3-2016 and 197 net LT-3's in the nine months to September 30th. 2,074 LT-3's are currently deployed, which is consistent with the number deployed at the end of Q3.

Diamond Game participated in the North American State and Provincial Lottery ("NASPL") Conference, which took place October 4-6 in Atlanta, Georgia. At NASPL, Diamond Game demonstrated the unique play of each of its installed LT-3 units to prospective customers and unveiled NexPlay™—a new suite of innovative lottery products. The NexPlay™ system is designed to integrate with the major providers of online lottery systems to enable the sale and display of traditional draw games. Diamond Game received positive feedback from potential customers following NASPL and is currently in discussions with a number of jurisdictions to install LT-3 units, as a result.

Highlights – Financial

Revenue in Q3-2016 of $5.6 million, compared to $5.3 million in Q3-2015

Average LT-3 WPU2 (win-per-unit) and ARPU3 (average revenue per unit) of $142 and $29, respectively

Adjusted EBITDA1 of $1.4 million in Q3-2016, compared to $0.9 million in Q3-2015

Adjusted EPS4 of $0.04 in Q3-2016, compared to $0.01 in Q3-2015

"During Q3, we generated solid Adjusted EBITDA and Adjusted EPS growth as units deployed over the past year ramped to a higher level of ARPU," said Richard Weil, Chairman and CEO of INNOVA. "While the LT-3 sales process can take time, once installed, the units generate strong recurring revenue that benefits INNOVA, lotteries and the charities they support. Our participation in NASPL this year generated strong interest from several potential customers and we look forward to continuing to grow into new jurisdictions over time."

Mr. Weil added, "I'd like to take this opportunity to thank Jim Breslo for playing a role in Diamond Game's transition to public company ownership over the past year and a half. Jim has announced that after 16 years with Diamond Game he will be leaving the Company to pursue other opportunities. He will remain a Director of INNOVA and we wish him all the best in the next phase of his career. I will be assuming the role of President at Diamond Game and look forward to continuing to work with the strong team we have assembled."

Adjusted EBITDA is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

(2)

WPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

(3)

ARPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators".

(4)

Adjusted EPS is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

For the three month period ended September 30,

For the nine month period ended September 30,

2016

2015

2016

2015

LT-3 Revenue

$

5,340,163

$

4,580,272

$

16,021,471

$

13,055,000

AGP Revenue

$

279,058

$

730,732

$

884,668

$

2,377,634

Total Revenue

$

5,619,221

$

5,311,004

$

16,906,139

$

15,432,634

LT-3 Key Performance Indicators ("KPIs"):

Total units

2,074

1,729

2,074

1,729

Net units deployed

52

34

197

354

WPU(2)

$

142

$

111

$

140

$

116

ARPU(3)

$

29

$

29

$

30

$

30

AGP KPIs:

Total units

224

666

224

666

Net units removed

(40)

(26)

(253)

(97)

WPU(2)

$

170

$

98

$

171

$

107

ARPU(3)

$

13

$

12

$

13

$

12

(1)

Adjusted EBITDA is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

(2)

WPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

(3)

ARPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators".

(4)

Adjusted EPS is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

Revenue

Three months ended September 30, 2016

LT-3 revenue grew by $0.8 million or 17% compared to the same period in 2015. This was partially offset by a decrease in AGP revenue of $0.5 million or 62%. LT-3 revenue growth was primarily attributable to 345 additional machine deployments relative to Q3 2015, most significantly in the Missouri, Ontario, and Maryland Veterans' program markets. The lower AGP revenue is primarily attributable to the removal of 442 machines from operation relative to the end of the same period in 2015, the majority of these related to the machine reductions in Texas. The significant LT-3 WPU increase from $111 in Q3 2015 to $142 in Q3 2016 was caused primarily by LT-3 deployment into comparably higher-performance locations in Missouri, and positive improvements resulting from our launch of additional game features in the Ontario market in Q4 2015. The significant increase in AGP WPU is primarily due to the removal of relatively lower performing WPU AGP machines.

Nine months ended September 30, 2016

LT-3 revenue grew by $3 million or 23% compared to the same period in 2015. This was partially offset by a decrease in AGP revenue of $1.5 million or 63%. LT-3 revenue growth was driven by the growth of our LT-3 installed base to 2,074 machine currently in operation, compared to 1,729 total LT-3 machines at this point in the previous year. Year to date machine count growth occurred in the Missouri Lottery market, with significant deployments into liquor by the drink locations in Q4 2015 and Q1 2016, as well as the Ontario market with the majority of new additions being deployed more recently. LT-3 WPU increased for the reasons noted previously, but ARPU remained relatively steady due in part to the fixed fee revenue components of some of our contracts. The lower AGP revenue is primarily attributable to the removal of 442 machines from operation relative to the end of the same period in 2015. As mentioned previously, AGP WPU growth has been driven by the removal of relatively lower performing AGP machines.

The machine reductions in Texas resulted from the termination of an equipment lease agreement between the Company's wholly owned subsidiary, Diamond Game, and Blue Stone Entertainment LLC ("Blue Stone") on January 5, 2016. Prior to the termination, Blue Stone operated donation-based sweepstakes terminals leased from Diamond Game ("Terminals") at the Ysleta del Sur Pueblo's (the "Pueblo") two entertainment centers in Texas, pursuant to a separate agreement between Blue Stone and the Pueblo. The Terminals, which have been removed from the Pueblo's entertainment centers, are part of a class of products previously referred to in the Company's communications as alternative gaming products, or AGPs.

In connection with INNOVA's initial public offering, the Company entered into an EBITDA support agreement ("EBITDA Support Agreement") with Amaya Inc. pursuant to which, subject to certain terms and conditions, Amaya Inc. will pay INNOVA each year for up to five years from July 1, 2015 an amount equal to the shortfall, if any, between (i) the Company's EBITDA directly or indirectly derived from the deployment of Diamond Game's products at the Pueblo's entertainment centers or in connection with INNOVA's relationship with Blue Stone and/or the Pueblo, and (ii) CAD$2.0 million. The Company believes that the EBITDA Support Agreement will substantially mitigate any adverse financial impact resulting from this development. A copy of the EBIDTA support agreement is available on SEDAR at www.sedar.com.

For the three and nine month period ended September 30, 2016, the Company recognized $397,733 and $1,014,942 of EBITDA support compensation, respectively as part of other non-operating income (2015: $nil).

Missouri

As disclosed previously, in response to budget language added by the legislature, the Missouri lottery had indicated that we would have to conclude our pilot program at liquor by the drink locations. However, due to a third party lawsuit against the State of Missouri requesting a ruling that the legislature acted improperly and therefore the language limiting the scope of our pilot program should be considered unconstitutional, a Missouri court has issued an injunction against any such removals directed by the lottery. Until such time as the case is finally determined, we cannot predict whether our machines will remain in the liquor by the drink locations.

Cost of products

Three months ended September 30, 2016

Cost of products was higher by $0.1 million or 24% compared to the same period in 2015 due mainly to higher paper costs resulting from increased sales volume.

Nine months ended September 30, 2016

Cost of products was higher by $0.1 million or 5% compared to the same period in 2015. Higher paper costs resulting from increased sales volume and higher machine service and data line expenses resulting from additional machine deployments were partially offset by lower repair parts expenses and a one-time standard inventory adjustment which occurred in Q2 2015.

Selling expenses

Three and nine months ended September 30, 2016

Selling expenses for the three and nine-month periods were flat and lower by $0.1 million, respectively compared to the same period in 2015. Lower expenses were due mainly to lower royalty expense resulting from the termination of Texas lease agreements, partially offset by higher shipping, promotion and travel costs.

General and administrative expenses

Three months ended September 30, 2016

General and administrative expenses were higher by $0.4 million or 9% compared to the same period in 2015. The increase was largely resulting from: higher salaries and wages expense of $0.1 million resulting from increased in headcount, audit fees of $0.1 million, stock based compensation expense of $0.1 million and depreciation of $0.1 million.

Nine months ended September 30, 2016

General and administrative expenses were higher by $0.6 million or 5% compared to the same period in 2015. The increase is attributable to: higher salaries and wages expense of $1.0 million, due to headcount additions including hiring of senior management personnel in conjunction with the INNOVA IPO in May 2015; $0.6 million of increased public company costs, including audit, legal and directors fees, lobbying, consulting, and investor relations expenses; stock based compensation expense of $0.4 million; $0.2 million increase in software and depreciation expenses of $0.2 million, partially offset by $2.0 million in IPO related costs in 2015 (discretionary bonus of $1.1 million, which was offset by a commensurate $1.0 million of paid in capital, and $0.9 million in acquisition related costs).

Financial expenses

Three and nine months ended September 30, 2016

Financial expenses for the three and nine-month periods were lower by $0.6 million or 85% and $1.7 million or 122%, respectively compared to the same period in 2015 due mainly to lower unrealized foreign exchange losses.

Income taxes

Three and nine months ended September 30, 2016

Income taxes for the three and nine month periods increased by $0.2 million and $0.6 million, respectively compared to the same period in 2015 due mainly to increase in earnings.

Outlook

We believe we are well-positioned for future growth in our existing lottery markets and other gaming markets. We have secured five lottery contracts in North America since 2012, four of which were earned after competitive request for proposal processes. Our sales and marketing staff continue to pursue long-term recurring revenue relationships with new customers, as demonstrated by our initial deployment of LT-3 machines in the state of New Hampshire in September 2016, as well as fostering growth within existing customers, as shown by the recent deployment of LT-3s into liquor by the drink locations in the State of Missouri, or machine increases in Ontario. We believe that our business development team has the ability to capitalize on its extensive relationships and knowledge of market opportunities and customer needs and preferences.

We are also actively pursuing opportunities to continue to grow our average WPU by improving game functionality, offering new game titles, and introducing enhanced features. Throughout the last 12 months we have deployed new features and enhancements into all existing facilities in Ontario. The new features have been very well received and have helped to bolster WPU and ARPU figures. We are currently in the final planning stages with the Ontario Lottery for offering new games titles and further deploying the new features in the Province. Similarly, we significantly increased the deployment quantities of our higher denomination game with the Missouri Lottery. This new game, initially introduced in small quantities in Q2 2015, has now been thoroughly deployed throughout the state and continues to dramatically outperform all previous games in the Missouri market. This has increased WPU and ARPU as a result. Building on this success, we are currently in the planning phases of offering additional new game titles and enhanced features to the Maryland Lottery market, the Maryland Bingo Hall market, and the Michigan Lottery market.

As a management team, we have a significant amount of experience executing accretive acquisitions and we see a number of opportunities in the lottery space. We will continue to evaluate opportunities and pursue those that meet both our strategic and financial criteria.

Normal Course Issuer Bid

As of September 30, 2016, the Company purchased and cancelled an aggregate of 229,100 Common Shares under its normal course issuer bid ("NCIB") at an average price per share of CAD$1.17 for a total amount of CAD$267,768.

INNOVA's interim consolidated financial statements and management's discussion and analysis for the three and nine months ended September 30, 2016 are available on SEDAR at www.sedar.com.

Non-IFRS Measures

INNOVA's financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). In this press release, as a complement to results provided in accordance with IFRS, INNOVA discloses and discusses certain non‐IFRS financial measures, including EBITDA, Adjusted EBITDA, Adjusted EPS, WPU and ARPU as well as other measures discussed elsewhere in this release. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of INNOVA's results of operations from management's perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of INNOVA's financial information reported under IFRS. These measures are used to provide investors with supplemental measures of INNOVA's operating performance. For a full description of these measures and, where applicable, a reconciliation to the most directly comparable measure calculated in accordance with IFRS, please refer to the "Non‐IFRS Measures and Financial Indicators" section in INNOVA's Management's Discussion and Analysis for the three-month period ended March 31, 2016, available on SEDAR at www.sedar.com.

About INNOVA Gaming Group Inc.

INNOVA develops unique games and products for the global gaming industry, with particular focus on state and provincial lotteries. Through the Company's wholly owned subsidiary, Diamond Game, INNOVA focuses on enhancing the revenues of government-sponsored lotteries and other regulated operators by offering its unique "extended play" products in traditional and non-traditional gaming venues. Its primary product is the LT-3, an instant ticket vending machine that dispenses tickets while simultaneously displaying the results of each ticket on a video monitor in an entertaining fashion. For more information, please visit www.innovagaminggroup.com.

Forward-Looking Statements

Certain statements included herein, including those that express management's expectations or estimates of our future performance or future events, including with respect to the deployment of additional machines, the creation of higher sales volumes and ongoing revenue and the expected mitigation of adverse financial impact as a result of the EBITDA support agreement, constitute "forward-looking statements" within the meaning of applicable securities laws. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management at this time, are inherently subject to significant business, economic, regulatory and competitive uncertainties, contingencies and risks that could cause actual results or events to differ materially from those expressed or implied in such statements. Applicable risks and uncertainties include those identified under the heading "Risk Factors" in INNOVA's annual information form dated March 28, 2016, available on SEDAR at www.sedar.com, and in other filings that INNOVA has made and may make with applicable securities authorities in the future. Investors are cautioned not to put undue reliance on forward-looking statements. The forward-looking statements contained herein reflect INNOVA's current views with respect to future events, and except as required by law, INNOVA does not intend, and undertakes no obligation, to update any forward-looking statements to reflect, in particular, new information or future events, or otherwise.